There are 15 million self-employed Americans.
If you’re one of them, there are some tax considerations you need to consider. But first, you have to make sure all your records are up to date. Record keeping is particularly important when you’re self-employed. This is because it gives you a good idea how well your business is performing.
But maybe even more importantly, it can save you some major headaches come tax time.
When you file your taxes, you’ll need the following documents:
You’ll need to fill out an IRS Schedule C if your income was over $400. Even if it wasn’t, you still may have to file if you meet any of the requirements listed in Schedule C (Form 1040) “Profit or Loss from Business (Sole Proprietorship).”
If your business expenses were less than $5,000, you may be able to use Schedule C-EZ.
You should also file if you’re eligible for any of the following:
Schedule C has five parts. In part I, you list all your business income and calculate your gross profit. In part II, you subtract all your business expenses. Next, you calculate your net profit or loss and report this number on Schedule SE (Form 1040). You only have to fill out the rest of the sections if your business requires you to:
Make sure you take all the deductions you’re entitled to take. Deducting business expenses reduces the tax you owe.
Remember things like the following:
Keep track of your expenses year-round and don’t wait until the last minute.
You also have to figure out if you owe estimated taxes. If you do, you need to pay them quarterly. Traditional employees get taxes withheld from their paycheck.
And the IRS wants to make sure freelancers do this too.
But you only need to do this if you expect to have a tax bill of $1,000 or more. Use Form 1040-ES for this purpose. You can pay your taxes using the blank vouchers in this form. Or, you can use the Electronic Federal Tax Payment System (EFTPS).
If you’re self-employed, you must take taxes into account when setting prices for clients. Make sure you’re careful about tracking business expenses, so you can deduct them at the end of the year.
You must also pay an SE tax as well as an income tax. SE tax is Social Security and Medicare tax (FICA). Although you have to pay the entire 15.3%, you’re entitled to write off half of this.
Even if it’s a side hustle, you still have to report that income.
- New computer
- Home office deduction
- Startup costs
- Dedicated phone line
- Mileage and vehicle costs
- Health insurance premiums
- Money paid to subcontractors
- Trade association membership
- Accounting and tax preparation fees
- Contributions towards retirement savings